Household saving is defined as the difference between a household’s disposable income (wages, income of the self-employed and net property income) and its consumption (expenditures on goods and services.)

Turkey Holding Down The Fort

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“Foreign investors like to see strong government and predictability. We’re not going to have either of these in Turkey over the coming months,” says Jonathan Friedman, who follows the country for risk consultants Stroz Friedberg in London.

With new elections scheduled for November 1, that could be an understatement. On June 6, the day before Turkey’s last parliamentary elections, most observers had a pretty clear idea of how things would shake out: The Justice and Development Party (AKP) would be in power, reforms might be discussed and Turkish businesses and banks would do their best to make anticipated 3% growth in GDP a reality.

But the future changed. The unexpectedly strong performance of the Kurdish-dominated, center-left People’s Democratic Party (HDP), which secured some 13% of the vote and 80 seats, reflected widespread popular disillusionment with politics and the governing AKP. Its electoral surge stripped the AKP of its parliamentary majority, dashed President Recep Tayyip Erdogan’s hopes of securing enough support to turn the Turkish government into a presidential system and unleashed new uncertainties on a country already no stranger to them.

Erdogan had made little secret of his desire for new elections in November rather than engineering an unwieldy grand coalition between his AKP and the main secular party, the Republican People’s Party (CHP), or the rightist Nationalist Action Party (MHP). Yet when talks between AKP premier Ahmet Davutoğlu and the CHP collapsed, making new elections inevitable, the outlook turned decidedly negative. The widespread view seems to be that Turks—who have already faced a battery of local, parliamentary and presidential elections over the past 18 months—are tired of heading to the polls. The risk for Erdogan is that a second vote may not produce a much different outcome.

“Opinion polls predict a similar result to June. This suggests that the political outcome may not be conducive to reforms that could gradually revitalize economic growth and promote a durable rebalancing to reduce the size and improve the quality of the funding of Turkey’s current-account deficit,” says Paul Gamble, senior director of sovereigns at Fitch Ratings.

Some critics say Erdogan is playing with fire by ending the ceasefire with the militant Kurdistan Workers’ Party (PKK) and deepening divisions in the hope of bolstering AKP support and pushing the HDP or MHP share of the vote below 10% so they cannot gain parliamentary representation.

A series of bomb attacks in Istanbul and in southeastern Turkey have exacerbated the uncertainty. And the flood of some two million refugees from wars in neighboring Syria and Iraq—with more expected — is straining the country’s finances and social cohesion.

“President Erdogan and the AKP might try to push the hard-liner stance against PKK so as to weaken both pro-Kurdish HDP and the ultranationalist MHP. This would be a very dangerous strategy... Going into new elections against a backdrop of escalating violence would be very negative for confidence amongst foreign investors, consumers and local businesses,” argues İnan Demir, chief economist at Finansbank in Istanbul.

For its part, the PKK has said it will not surrender in the face of Turkish military assaults on its camps in southeastern Turkey and northern Iraq, indicating that Erdogan will have his work cut out in achieving the total victory over the group that he desires and insists he will achieve.

Official economic statistics give cause for concern. After 2.9% GDP growth in 2014, some 0.4% below the official forecast, GDP rose by just 2.3% year-on-year in the first quarter of 2015, one of the lowest rates for many years, suggesting Turkey may not hit even the (reduced) World Bank forecast of 3% for the year. With internal demand dampened by rising domestic uncertainty, exports have also performed poorly—down almost 9% over 2014 at the end of August—with the mild improvement in the current-account deficit (currently around 6.5% of GDP) explained mainly by falling imports, largely of gold, and lower fuel prices. Inflation in August rose to 7.1% despite falling energy prices, reflecting the lira’s fall. An easing in monetary policy is unlikely, with one-week repo rates expected to stay at or close to their current level of 7.5%, although the Central Bank has indicated it may simplify the system, introducing just one key interest rate in place of the current three.

President Erdogan and the AKP might try to push the hard-liner stance against PKK so as to weaken both pro-Kurdish HDP and the ultranationalist MHP. This would be a very dangerous strategy.

~ İnan Demir, Finansbank

The Turkish lira, along with most other emerging markets currencies, has been soft and is expected to show continued weakness and hit successive historic lows against the dollar. The lira has lost 26% of its value against the dollar since the start of the year, and 15% in the three months from June to September—a worrisome drop, given that gross external financing needs are equal to 25% of GDP, or about $200 billion a year.

The current uncertainty has also hit tourism, which accounts for over 12% of GDP (above the global average of 9.6% and almost double the 6.4% that Turkey’s finance sector contributes to GDP). Revenues from tourism financed over 50% of last year’s current-account deficit. Instead of an expected boost from Turkey grabbing some of Greece’s normal tourist flow, arrivals in 2015 have declined, with figures for the second quarter 2% down from the year-earlier period and revenues off by almost 15%. Russian tourists, in particular, have stopped coming.